UPDATE 1-Portugal crisis talks said to progress positively
* Premier to meet president after talks
* Bond yields retreat, stocks rebound
* Concessions to coalition partner could involve easing goals
LISBON, July 4 (Reuters) - Talks between Portugal's prime minister and his coalition partner were said on Thursday to be progressing to defuse a political crisis that has jolted Lisbon's hope of a smooth exit from its international bailout.
Prime Minister Pedro Passos Coelho kicked off meetings with the leader of the rightist CDS-PP party overnight and met with him again on Thursday to heal a rift that some investors say could make a second rescue package necessary for Lisbon.
"The conversations are ongoing in a very positive astmosphere," said a government spokesman without giving any further details.
Portuguese assets were highly volatile on the day but by the afternoon bond yields fell and stocks recoveredg most of their sharp losses from a day earlier.
European markets were helped after European Central Bank President Mario Draghi signalled the bank could cut interest rates further.
Draghi, however, also made clear that Portugal does not currently qualify for ECB bond-buying, essentially leaving the country adrift to solve is own crisis.
The resignations this week of finance minister Vitor Gaspar and foreign minister Paulo Portas, who also heads the CDS-PP, have threatened to deprive the government of a majority in parliament.
Gaspar, architect of the spending cuts and tax hikes required by Portugal's lenders in exchange for a bailout, quit as finance minister on Monday, citing an erosion in support. Portas resigned the next day because he objected to the appointment of Treasury Secretary Maria Luis Albuquerque to replace Gaspar
The threat of a prolonged crisis that could lead to elections in a few months has opened the possibility of delays to reforms and cost-cutting under the country's 78-billion-euro bailout, further undermining the economy that is its worst slump since the 1970s.
Passos Coelho is hoping to preserve his coalition government by offering concessions to the CDS-PP. Portas's CDS-PP party has agreed to negotiate a solution and said its other two ministers would not resign, at least for now.
"A negotiated solution in which Portas stays out of the government but the coalition survives would allow the CDS-PP leader to partially save face," said Antonio Barroso, a London-based political analyst at advisory firm Teneo Intelligence, in a research note. "However, the negotiations are likely to prove difficult."
The head of the Portuguese Industry Confederation piled pressure on the government to find a solution quickly. "The crisis has to be overcome in parliament, and we think the conditions for that to happen exist," Antonio Saraiva told Reuters.
In a sign of how widespread disenchantment with austerity has become in Portugal, Saraiva also said the country has to be given more time by creditors - the European Union and International Monetary Fund - to meet budget goals under their bailout programme.
The returns investors demand to hold Portugal's 10-year bonds were about 15 basis points lower on the day at 7.35 percent. On Wednesday they surged to more than 8 percent - their highest since November.
Lisbon's PSI 20 stock index was up 4.0 percent after sliding 5.3 percent the previous day, as hopes grew that the government will stay on and avert an early election.
"So far we are getting better headlines from Portugal today, and I think yesterday's move was too big," said Ioannis Sokos, rate strategist at BNP Paribas.
The EU and IMF are due to start their next review of the economy on July 15, but that visit might now be delayed.
Passos Coelho has fought to keep Portugal on course to complete its 78 billion euro ($102 billion) bailout next year as scheduled, but austerity measures have pushed it deeper into its worst economic crisis since the 1970s.